NFT S Are An Asset Bubble - By Michael Morgan

NFT's are an Asset Bubble.
We can think of this as the ‘Part 2’ to my last essay, which attempted to shine some light on what’s really going on under the hood of cryptocurrency and blockchain technology. This essay is a chance for me to play my own devil’s advocate, as I still think there’s a lot of due diligence that should be done in this space before riding in all gung-ho and cryptocurrency firing off barrels of cash.
Think of today’s essay as fitting into the category of "prediction" (be it stupid, insightful, or invest in nft otherwise. Only time will tell I guess).
Crypto and the blockchain are viable technologies that will have long term effects on the digital environment, but I strongly believe the contemporary wave of NFT’s are a fad that will end with more losers than winners.
But before explaining to you exactly why I think this is the case, I think it’s necessary that I set the stage a bit and talk about inflation, recessions and where our economy may be headed as of now.
Inflation this, inflation that. What really is it?
Inflation (as defined by the super exciting economists) is "an economy-wide, sustained trend of increasing prices from one year to the next. An economic concept, the rate of inflation is important as it represents the rate at which the real value of an investment is eroded and the loss in spending or purchasing power over time." A less stiff way to think about inflation is this: Say you love clams, and you’ve got 50 clams in your personal clam account. A lot of other people aren’t doing so well on clams, so the Federal Clam Treasury sends a ton of new clams into the clam market. Now, your 50 clams have automatically become 100 clams. Wow, you doubled your clam account! But… the true clam market has gained triple the number of clams it had before. You have more clams to your name, but each of those clams is worth less than before. That, ladies and gents, is inflation; in simple seafood terms.
Okay. So why is it relevant now?
Over 5 trillion dollars have entered circulation in our country in the past year and a half or so. 5 trillion — If you started spending a million dollars every single day since Jesus was born, you still wouldn’t have spent ONE trillion dollars by now. Obviously, many of the checks that have been cashed during the last 2 years have gone to help families and businesses that really need it, but this much money does not enter our economy without consequences. US inflation calculator has shown inflation rates in November of 2021 to be about 6.2%, which is the highest they’ve been reported since about 1990. Besides the mass amount of money entering the economy, there are a number of other downstream effects that exacerbate the rates of inflation in our country.
One of those things is interest rates. For my non-economist readers, a quick aside on why interest rates are altered and how they affect inflation: simply put, the government will lower interest rates to speed up the economy and encourage spending. This is because lower interest rates are good for borrowers of money (they pay less back on that borrowed cash over time) and bad for savers of money (they get less back on their cash if it’s just sitting). These joint effects promote an environment where more people are investing, and more people are spending their money, which in turn increases output of the economy. Since 2010, after the housing market crash, the US interest rates have been extremely low — close to zero in fact.
As you can see pictured above, these low interest rates have been one factor in causing the rapid expansion of the stock market since 2009-10.
The job market is another factor that can affect inflation. As of now, we are in a period that many politicians and economists are referring to as "The Great Resignation." There is a labor shortage in our country, as the most recent jobs report showed some 11 million job openings in October, near a record high. Factors causing this shortage could have been likely related to the trends I recently mentioned. With the huge increase in stimulus checks and businesses payouts, many any individuals in the US may have assessed their options, and found more of an incentive to stay home and get paid for it, rather than work long hours at a low paying job. Whatever the cause(s) of this job shortage may be, there are some consensus opinions on what the effect will be: inflation. Because the jobs that cannot be filled are low wage (typically labor-based) jobs, businesses will be forced to raise wages just to find the labor demand to keep their operations going. Due to being forced to raise wages, the business will be forced to increase the prices of their goods and services as well, thus proliferating rising prices and inflationary pressures (the shortage of labor may also lead to the proliferation of automated/ technology labor sources, but we can save that topic for another day).
Can it be stopped?
The interesting thing is, inflationary efforts themselves are behaviorally and politically encouraged — which can become a problem. Presidents are now more and more pressured to make sure that the economy expands under their control, because the main measuring stick people use to asses their commander in chief is whether or not their retirement accounts are doing well. This leads to the effect of inflation being the default mode of rule, more often than not. While the growth of our economy is good, these inflationary incentives lead to something that causes most recessions: a failure to stop the inflation. Once things get out of control, policymakers begin to fear what may happen once the inflation stops, the money printing machine turns off, and the economy has a chance to cool down. This fear of ripping off the band-aid (raising interest rates or putting the brakes on pumping money into the economy) causes the bruise to grow infected, and leads to bigger problems that will have to be dealt with down the line.
Stimmy after stimmy is rained down, and we look back and wonder why we didn’t see the warning signs earlier…
I get it! Inflation is coming. What’s this got to do with NFT’s?
All of that talk was to make evident that we are nearing an economic and political environment that is perfect for bubbles and eventual bursts. The most recent and punishing bubbles in history were during times of great inflation, in the 20008 housing crisis and the dot-com bust of the late 90’s (interesting to note, however, that the measured inflation today is still larger than either of those points in history).
The root problem in most bubbles is that a particular asset price shoots extremely high, and is not accurately corrected to a reasonable price by the market. This failure to correct the price to a more representative level can be due to a number of factors. One of the main factors that can cause this is " an increase in the supply of money and credit flowing into that market, which gives buyers the ability to continue to bid prices higher and higher " (sound familiar?). Asset bubbles in history are also often fueled on the back end by tons of civilian capital, from people who have little to none real investing experience. A report from ChainAnalysis shows that " Retail buyers have accounted for 80% of all NFT transactions. While only 1% of NFT transactions between $10,000-100,000 were institutional transfers." This is a game that very few professionals are playing. This can sometimes be a good sign, but often that is not the case.
At the end of the day, the main question that should determine whether a financial trend is truly bubble like or not is "does this asset hold real value? Or is it being overestimated by the investors?" In the case of the vast majority of NFT’s, I think there is a clear answer. They say a picture is worth 1,000 words, so I’ll let this one do the talking:
This golden money here (Bored Ape Yacht Club NFT) was just recently sold for 600 ETH. That translates to nearly 2.5 million dollars . Most NFT’s like this have very little intrinsic value other than internet clout and status signaling. Many believe that the true value of NFT’s will be realized in the ‘Metaverse.’ FYI, this does not yet exist . Even when it does, Mark Zuckerberg is taking control of all your digital possessions to build his Meta Empire (I’m kidding… mostly). On the stock market, the assets that people buy are attached to the value and revenues of whatever company they have purchased. You gain partial ownership of a true value-creating entity. This is just about the exact opposite when it comes to most NFT’s, cryptocurrency and many of them are being sold for a fortune.
Overall, rising liquidity from stimulus payments, rising inflation, and rising excitement about the allure of NFT investments have created an environment perfect for an asset bubble, and I strongly believe NFT’s are the primary candidate. Once interest rates are driven up and/or the inflation becomes a bit too pressing, I think a lot of capital will be leaving the NFT realm, leaving a lot of ‘investors’ in a bad spot.
That being said…
I am but a humble university student, who wrote this essay while he should’ve been studying for finals. Take my opinions with a grain of salt, and be sure to do your own digging. Still, if you plan on making some money off NFT’s, PLEASE don’t put them into your retirement portfolio or your kid’s college fund. I’m 100% sure there’s still money to be made in NFT’s, but I would advise a speculative, short-term trading mentality — not a long term investment one.
Hope you all found my (ideally somewhat logical) argument interesting, NFT and I hope it compelled you to think critically about what’s unfolding around you, in order to form some contrarian opinions of your own. I’m glad you stuck around to read until the end.
Until next time I feel the urge to write,

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